750 Hour Rule for Real Estate Professional Status

IRC Section 469(c)(7)(B) establishes the 750 hour rule as a quantitative floor for real estate professional status. A taxpayer must perform more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. The statute uses "more than," which means exactly 750 hours does not satisfy the threshold; 751 or more are required.

The 750 hour rule operates as one half of a two-part test. The second component, the more-than-half test, requires that more than 50 percent of all personal services performed during the year are in real property trades or businesses. Both tests must be satisfied in the same tax year for the taxpayer to achieve real estate professional status.

The statute identifies specific real property trades or businesses in which hours can be counted: real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, and brokerage. Hours spent in any of these activities count toward both the 750 hour minimum and the more-than-half test, provided the taxpayer also materially participates in the activity.

Practical examples of qualifying activities include:

• Physical maintenance, repairs, and improvements to a rental property
• Tenant screening, lease negotiation, and tenant communications
• Property showings and vacancy marketing
• Bookkeeping and financial record management for the rental activity
• Contractor supervision and construction oversight
• Real estate brokerage services if licensed and active
• Property acquisition due diligence and closing coordination

Hours in a real estate business operated by a pass-through entity can count if the taxpayer materially participates in that entity's activity and the entity itself is engaged in a qualifying real property trade or business.

Not all time spent in connection with real estate investments produces qualifying hours. The IRS and Tax Court have identified several categories that do not count toward real estate professional 750 hours:

• Commuting time to and from properties
• Time spent reading general real estate investment books or publications
• Attending conferences or seminars not directly tied to a specific activity
• Hours as a passive investor in a limited partnership or syndication
• Activities in real estate investment trusts (REITs)
• Hours in a real property trade or business in which the taxpayer does not materially participate

The distinction between qualifying and non-qualifying hours has been heavily litigated. Taxpayers should be conservative when categorizing borderline activities and should document the specific task performed in sufficient detail to justify classification as a qualifying service.

The more-than-half test requires that personal services in real property trades or businesses exceed 50 percent of all personal services performed during the year. For this calculation, "personal services" includes time in any trade or business, employment, or professional activity.

The table illustrates why the more-than-half test, not the 750 hour requirement, is typically the binding constraint for investors with primary employment. For a deeper analysis of documentation strategies, REPS recordkeeping requirements covers what the IRS expects and what courts have accepted.

For a W-2 employee, satisfying the real estate professional 750 hours test while also meeting the more-than-half threshold requires that real estate hours exceed employment hours. A typical full-time employee logs approximately 2,000 hours per year, which means they would need more than 2,000 documented real estate hours to pass the more-than-half test, in addition to clearing the 750-hour floor.

Some taxpayers have attempted to argue that their employment hours should be discounted, or that certain employee activities relate to real estate. Courts have been uniformly unsympathetic to these arguments. Hours worked as an employee in a non-real-estate business count fully against the more-than-half test.

The most common path for employees is to transition to reduced employment, leave employment entirely, or identify years during which employment hours are significantly reduced due to leave, sabbatical, or early retirement.

When a taxpayer owns multiple rental properties, hours across all properties are aggregated toward the 750-hour REPS threshold. This aggregation applies automatically for the 750-hour count and more-than-half test at the REPS level.

However, material participation is still evaluated at the individual activity level unless a grouping election is made. This means a taxpayer can satisfy the 750-hour rule by combining hours across ten properties, but must still show material participation in each property (or the grouped activity) for losses from each to be non-passive.

Taxpayers who intend to rely on real estate professional status and have multiple properties should consult with their tax advisor about the mechanics and timing of the grouping election before the close of the tax year.

Understanding how to meet the 750 hour rule begins with accurately counting which activities qualify, tracking hours in real time, and being realistic about the more-than-half constraint. Several planning considerations can increase the probability of qualification:

• Self-managing properties rather than delegating entirely to a property manager generates qualifying hours
• Expanding a real estate portfolio increases the pool of qualifying activities
• Engaging in real estate brokerage or development as a business creates additional qualifying hours
• Reducing non-real-estate employment hours lowers the more-than-half hurdle
• Accurately categorizing and documenting all qualifying hours at the time they are performed

Planning for the 750 hour test is not retroactive. The determination is made annually based on actual hours performed and documented during the tax year.

The IRS imposes a high documentation standard for real estate professional hour claims. Contemporaneous records are the only reliable defense in an audit. The minimum components of an acceptable time log include: specific date, property address or activity description, nature of the task performed, and hours spent.

Digital tools such as shared calendars, project management applications, property management software logs, and time-tracking apps can satisfy the contemporaneous standard if they create a record at or near the time of service. Printed calendar entries, contractor invoices, and communications corroborating presence at a property provide helpful supporting evidence.

Reconstructed logs prepared weeks, months, or years after the fact are consistently rejected in Tax Court proceedings and are one of the most common reasons taxpayers lose REPS challenges despite having performed the hours.

Real estate professional status is one of the more frequently audited claims in high-income individual returns, particularly when large rental losses appear on Schedule E alongside significant W-2 income. The IRS often requests the taxpayer's time logs, calendars, and supporting documentation as part of an information document request.

Examiners will test both the 750-hour threshold and the more-than-half test separately, and will evaluate whether the hours claimed are in activities in which the taxpayer actually materially participates. Inconsistencies between the hour log and other records, such as employer payroll records showing full-time employment, frequently result in adjustment.

Investors who successfully satisfy the 750 hour rule and meet the more-than-half test can use accelerated depreciation from cost segregation studies against non-passive income. This is the primary reason high-income investors pursue real estate professional status alongside a cost segregation engagement.

The interaction between the 750 hour rule, material participation, and accelerated depreciation is analyzed more fully in the real estate professional status complete guide, which covers the full two-test framework, grouping elections, and common qualification pitfalls in detail.